Commodity Currencies Take a Beating After RBA Cuts to Record Lows

The Reserve Bank of Australia made history last night cutting its key benchmark interest rate to an all-time low at 2.75%, a 25-bps rate cut from 3.00% that generally surprised market participants. According to Bloomberg News, of the 29 economists surveyed, 21 had expected a hold; and the Credit Suisse Overnight Index Swaps were pricing in a 52% chance of a 25-bps cut. Needless to say, the bit of surprise has provoked some shuffling out of the Australian Dollar today, which has fallen to under $1.0200 against the US Dollar.

The timing of the RBA cut is interesting because of the data due this week: the May Chinese Trade Balance on Wednesday; April Australian labor market data on Thursday; and the April Chinese Consumer Price Index on Thursday. The RBA has tended to show its hand ahead of key data, as history shows. Back in June 2012, the RBA kept its key rate on hold despite an expectation for a 25-bps, and over the next three days, the trifecta of GDP-labor market-trade data all beat expectations. Thus, with a relatively unanticipated 25-bps cut today, I would be expecting weak Australian and Chinese data over the next few days, all of which could underpin a move in AUDUSD towards $1.0000 by the end of May.

Elsewhere in FX today, the Euro is the top performer as German Factory Orders for March beat expectations and raising hope that the economic slowdown in the core is exaggerated. But it is worth pointing out that a significant detractor from German firms’ competitive edge – the Japanese Yen’s weak exchange rate – truly didn’t materialize until late-March/early-April, when the Bank of Japan announced its full throttle easing policy. Thus, the impact of a higher EURJPY exchange rate, which is likely to stay elevated near or above ¥130.00 (barring significant fundamental distress in Europe) hasn’t been quite felt yet by exporters for a long period. I’m not inspired by this German data, and neither is the Euro it seems – after all, it is working on a second consecutive Inside Day versus the US Dollar.

Taking a look at European credit, a rebound in peripheral bonds has helped keep the Euro elevated today. The Italian 2-year note yield has decreased to 1.232% (-5.7-bps) while the Spanish 2-year note yield has decreased to 1.516% (-2.3-bps). Similarly, the Italian 10-year note yield has decreased to 3.858% (-5.4-bps) while the Spanish 10-year note yield has decreased to 4.052% (-2.9-bps); lower yields imply higher prices.

EURUSD: The EURUSD is working on a second consecutive Inside Day today after the German data, but a lack of bullishness has failed to produce a break towards Friday’s highs. I maintain that “there’s clearly significant selling interest above 1.3200, as a Double Top has formed coinciding with price contained twice at the 66 level in RSI. The high for May came on the first trading day of the month (just like in February), so technically I have a bearish bias. With respect to the Inside Day forming today, however, I am neutral. In either case, a print above 1.3245 would negate the bearish bias, while a move below 1.3030 (last week’s low) should spur further selling.”

USDJPY: No change: “As has been the case in the USDJPY pullbacks throughout 2013, the most recent sell-off in the pair saw the 8-/21-EMA structure compress close to the point of flipping to bearish, but price firmed and turned higher ahead of such an event. Accordingly, a move back towards 100.00 is in the cards, and a less-dramatic Bullish Ascending Channel appears to be forming once more. I like USDJPY higher now that US data has started to improve, and a move above 99.95 would warrant a long entry in the pair for a quick move towards 102.00.”

GBPUSD:The GBPUSD is working on a second consecutive Inside Day as price holds near the top rail in the ascending channel that’s been in place off of the March 12 and April 4 lows. Although near-term momentum has turned higher for the Pound, rejuvenated US data could be the spark for a return towards channel support, likely found near 1.5400 (mid-April swing highs) by the end of next week. While channel support today comes in at 1.5290/310, a move towards these levels seems unlikely at present time. It’s also worth noting that the recent consolidation could be a Bull Flag, which is given credence by the net short positioning of retail traders. In either case, I’ll be watching for a move above 1.5600/10 or below 1.5475/500 before a trade is taken.

AUDUSD: The RBA rate cut spurred a break of the 1.0200/20 level noted yesterday, and sellers have indeed been inspired to continue the push towards yearly lows just above 1.0100. The near-term bearish bias would be negated if price trade above 1.0385, the topside limit of the Bearish Evening Star candle cluster. It is worth noting that price and RSI are falling into levels where support has been found before; a break here would be cataclysmic. It is also worth noting that the uptrend off of the June 2012 and March 2013 lows broke today, suggesting a retest of 0.9850/900 might be in the cards over the coming weeks.

S&P 500: No change: “The headline index remains strong although there is some theoretical resistance coming up (this is unchartered territory, so forecasting price relies heavily on valuations, mathematical relationship, and pattern analysis). As first noted in mid-April, 1625 should be a big figure where sellers come in: channel resistance off of the February 25 and April 18 lows (drawn to the April 11 high) aligns neatly with the 100% Fibonacci extension off of the December 28 (fiscal cliff) and February 25 (Italian election) lows. It’s hard to be bearish risk right now, but it is worth noting that the divergence between price and RSI continues, suggesting that few new hands are coming into the market to support price (recent volume figures would agree).”

GOLD: No change: “Price has rebounded nicely following the dramatic sell-off in the beginning of April, yet remains contained by the crucial 61.8% Fibonacci retracement at 1485/90. This “Golden Ratio,” if achieved with a weekly close above, would suggest that a major bottom is in place, setting up for a rally back towards 1565/70 at a minimum. If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher.”

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